Government Spending Blunts Economic Progress

Can the U.S. economy grow at a rate of 3 percent, 4 percent, or even better in the years ahead?

Can the U.S. economy grow at a rate of 3 percent, 4 percent, or even better in the years ahead? Or will the growth rate slow to what some have called the “new normal” of 2 percent? It all depends on whether government gets out of the way.

In the 1960s and early 1970s, the U.S. economy grew at an average rate of 4.3 percent, according to financial adviser Douglas Carr, writing for The Hill. At that rate, the standard of living -- or gross domestic product per person -- would double over a 40-year period. By comparison, from 2010 to 2017, the U.S. economy grew at a rate of 2.2 percent a year, and the European Union grew at a dismal 1.4 percent annually. “Neither figure is good,” wrote Carr.

The population of the United States increases every year because births and immigration outnumber deaths. The American population grew by a bit less than 1 percent annually after the year 2000. That means that if the U.S. economic pie grows by only 1 or 2 percent, any increased economic output must be shared by more people, and thus the average American family isn’t noticeably better off from one year to the next.

Fortunately, U.S. economic growth has accelerated since Donald Trump entered the Oval Office. In 2018, U.S. output grew by 2.9 percent, after adjusting for inflation, in part due to the effects of the Trump-led Tax Cuts and Jobs Act and the administration’s deregulatory effort. Even better, in the first three months of 2019, the economy grew at an annual rate of 3.1 percent, according to revised figures from the U.S. Department of Commerce released May 30.

Although these numbers are a major improvement over the weak growth in the Obama era, even 3.1 percent growth means it would take many decades to double living standards. Under these conditions, it would take far too long to raise all Americans (willing and capable of working) out of poverty.

Hence, the rate of economic growth matters significantly. Although the 4.3 percent growth of the 1960s sounds impressive by today’s standards, it was lower than the growth in the 1950s and paled in comparison to the surging economies of Western Europe during the same period.

“From the 1960s to the early 1970s today’s basket cases -- Greece and Portugal -- were growing at impressive annual rates of 7.7 percent and 6.9 percent, respectively,” writes Carr. “Spain expanded 7.3 percent per year, while Austria, Belgium, Finland and France all grew around 5 percent.” Japan grew at a very impressive 9.7 percent rate from 1960 to 1973.

What has led to the slowed growth of developed countries in Europe, East Asia, and North America in recent years? The answer is simple, according to Carr: Government spending in these countries has increased substantially.

“Since the early 1970s,” writes Carr, “one-fifth of the economies of Greece, Portugal, and Spain has shifted from the private sector to the public sector, as government expenditures doubled [as a share of the economy].” In Japan, government’s share of the economic pie grew from around 20 percent in the 1960s and early 1970s to nearly 40 percent today, says Carr. In the United States, government spending has grown from 30 percent to nearly 40 percent of output since the 1970s.

What has driven the increase in government spending in all of these countries has been a vast expansion of the welfare state. Unfortunately, this has dampened investment, innovation, and economic growth, because less capital is available for the private sector, the home to innovation and technological advancements.

Unless we get government spending under control, slow growth and lower living standards for all Americans could be the “new normal” for generations to come.